T-day is upon us and the 25% tariffs on Mexico and Canada with an additional 10% on China have just gone live. Retaliation is set to be swift as Canada looks at imposing restrictions of C$30 billion on US products which will be extended after three weeks, Mexico will announce its own package later as China lines up the agricultural trade with the US for a 10-15% counter-tariff. 

The response in markets is suitably apt as the Nikkei and Hang Seng fall 2%, representing global bourses at time of press following a very bruising day on Wall St. However, there has been a late morning recovery of losses as some of the tariff effect is hard to qualify, quantify, may be priced-in and not be over as metrics in the US had investors spooked anyway. The ISM Manufacturing PMI headline number of 50.3 is softer, but on the face of it rather benign. However, the make up in subset readings causes much concern. Manufacturing New Orders Index fell from 55.1 in January to 48.6 in February and Manufacturing Employment Index fell from 50.3 to 47.6. Lower orders and lower employment may be the work of tariff fear, but such data has ‘recession’ on the lips of doomsayers, which in other times of exceptionalism might be ignored but not at this sensitive juncture in world trade affairs.

Such anxiety is not lost on oil prices. Whatever fear wanders through the wider suite adds to an oil market beset with news that makes forward supposition impossible. The Oval Office bullying is not over yet. President Trump has announced a halt to military aid for Ukraine in a combination of petulance and a strong-arm tactic of bringing President Zelensky to heel. The oil fraternity smells a headlong deal with Russia as the White House, according to the Guardian, has asked the state and treasury departments to draft a list of sanctions that could be eased for US officials to discuss with Russian representatives in the coming days. With OPEC+ surprise announcement that the April return of shuttered oil barrels will indeed go ahead, Brent prices might not be jumping up and down on the trapdoor of $70/barrel, but such news and sentiment will have it dancing over it in a test of the psychological number’s fortitude.

Two Sessions, too few choices for China

As with every announcement in this moveable feast of tariff (more like what if) considerations, analysis and opinion forming have the potential to last as long as the heat on the breath of whoever mutters an update. The gathering of the clans in China, where the Two Sessions of the Chinese People’s Political Consultative Conference (CPPCC) today and the National Peoples’s Congress (NPC) tomorrow, will over the next week deliberate on the priorities of policy and economic expectations for the ensuing year. How much harder planning will be made will depend on whether the tariffs threatened by the White House on China do become an entrenched reality rather than a means of barter.

The meetings are managed affairs, and reactions to tariffs or pre-prepared speeches might initially give a light touch in language. The first main banner talk will come from Premier Li Qiang, who will address the NPC at the start of its convening and in the main most China watchers will be looking for a GDP target. Whether or not the forward planning toward growth will be subject to tariff caveats or even if a trade war with US will be noted might just be an admission too far. The hierarchy of China wear the GDP growth target like a badge of honour and any admission that the probable 5% target could be threatened by interference from the US is unlikely to be given much oxygen. China measures itself internationally and sells its prowess domestically by the rate of GDP, therefore, declines in value are almost intolerable given such importance to national pride. It is also not used to the lowered readings post-pandemic. Since 1990 GDP growth has averaged at an expeditious 9%, blasting all other economies before it. Indeed, the global average has been around 2.5% for the same period and China has only failed to beat the world’s mean once in 2022. Whatever concessional language or counter-tariff talk may emerge; the GDP growth number will stay hallowed.

That is not to say a head-in-sand attitude will befall the Two Sessions. Last week and picked up by Alliance News and quoted in the Morning Star, China’s Xi Jinping did not shrink from threats the country’s economy still faces. "At present, the unfavourable impact of changes in the external environment has deepened, and China's economy still faces numerous difficulties and challenges," Xi wrote in an article in Qiushi, the ruling Communist Party's official journal. “External environment” is a polysemous statement and can refer to current trading conditions or the tariff-wielding White House resident. Lingual intent shows a reluctance to not name the tiger stalking the globe’s trading norms for fear of poking it, therefore, additional reciprocal tariffs might be being lined up, but they will not be showcased until necessary. The Global Times reported a source calling the US fentanyl stance a pretext allowing for international economic blackmail. Any countermeasures, the report went on to say, would involve US agriculture and foodstuffs. This proves this morning to be correct, but so does the way in which they are announced. China at least is taking a softly-softly approach at present, it very well remembers the upending of international trade during the last trade war, and because the economy leans so heavily on exports a circumspect approach makes good sense.

For those of us attacking China with an oil eye, the continued decline in its oil space has become a reliable instrument when rolling out a bearish view. Strategic and defensive monetary policy must become looser and target a domestic market that sits fallow awaiting nutrients. A much easier economic attitude needs to unfold for markets, including ours, to believe demand will change domestically. Grand bond issues to local government and the like need to be replaced with cuts to the Reserve Requirement Rate (RRR), the Loan Prime Rates (LPRs) and Repo rates to shake a risk-dormant populace. Everyday folk are cornered by the housing market still, therefore, it is essential that all tools are aimed in their direction to bring about a change in national timidity. Until we read of such measures in either of the Two Sessions’ readouts, even an avoidance of a tariff war will not mean much for an opinion revision to China’s oil space and ultimately demand.

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